Newsvendors Tackle the

Newsvendor Problem
Martin A. Koschat Glorian L. Berk Jeffrey A. Blatt
Nancy M. Kunz Michael H. LePore
TDSAOL Time Warner, Sports Illustrated Building, 7th Floor, 135 West 50th Street,
New York, New York 10020-1201
martin_koschat@timeinc.com glorian_berk@timeinc.com jeff_blatt@timeinc.com
nancy_kunz@timeinc.com michael_lepore@timeinc.com

Sam Blyakher
McKinsey & Company, 55 East 52nd Street, New York, New York 10022
sam_blyakher@mckinsey.com
This paper was refereed.

In 1998, the retail sales and marketing division of Time Inc., the largest publisher of con-
sumer magazines in the US, reviewed its newsstand distribution principles and procedures
for its magazines. This review affected the three major distribution decisions: the evalua-
tion of each magazines national print order, the wholesaler allotment procedure, and the
store distribution process. For this three-echelon distribution problem, we had to adapt well-
known formal solutions so that they could be implemented within the constraints of the
magazine distribution channel. The revised process, referred to as Time Inc.s Draw Man-
agement Program, has generated incremental prots in excess of $3.5 million annually.
(Inventory/production: applications. Industries: communications/journalism.)

I n the US, the distribution channel for consumer

magazines sold at retail consists of publishers,
wholesalers, and retailers. Currently, several thousand
consumer magazines are distributed to about 200,000
stores. These numbers, however, belie the market con-
centration in this industry. In many retail outlets,
the leading 100 consumer magazines, by and large
published by a handful of major publishing houses,
account for over 80 percent of all unit sales volume.
Most of the 200 magazine wholesalers servicing retail-
ers are organized into four groups. The leading 200
retail chains account for over 80 percent of all maga-
zine sales.
Distribution levels in the channel are negotiated by
all partners. As publishers take unsold product back
for a full refund of cost, they are mostly responsi-
ble for determining the national print order as well
as each wholesalers allocation. Wholesalers usually
determine each stores allocation.
All channel members should be concerned with
efciently distributing magazines. Publishers, because
they take unsold product back for a refund, stand to
lose most from inefcient distribution. This nancial
exposure motivated the retail sales and marketing
division of Time Inc. in 1998 to review its distribu-
tion principles and procedures. As a result, it made
changes in three major areas: how it evaluated each
magazines national print order, how it allocated
magazines to wholesalers, and how it recommended
wholesalers distribute magazines to stores.
The year 1998 was also the 75th anniversary of Time
magazine, Time Inc.s agship publication. This coin-
cidence makes one question why it took 75 years to
resolve the distribution problem. The optimal alloca-
tion, after all, is prescribed by the solutions to the

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Vol. 33, No. 3, MayJune 2003, pp. 7284 1526-551X electronic ISSN
 KOSCHAT, BERK, BLATT, KUNZ, LEPORE, AND BLYAKHER
Newsvendors
newsvendor problem and its many cousins (Porteus
1990). Such formal solutions, however, require timely
and accurate information that decision makers in the
magazine retail channel often lack.
Imperfect knowledge makes allocation decisions
dependent on managerial judgment. In our review of
product allocation in the magazine distribution chan-
nel, we realized that a process based on judgment
is inherently unstable. The boundaries between deci-
sions that should be based on managerial judgment
and those that should be based on formal reason-
ing blur easily, and the outcome is often a pro-
cess largely driven by heuristics and unsubstantiated
beliefs with little attention paid to formal accounting.
Human decision makers left to their own judgment
tend to make biased allocation decisions (Schweitzer
and Cachon 2000). This observation was conrmed in
our review.
Our review included interviews with distribution
managers at Time Inc. and at wholesalers. These man-
agers often provided conicting reasons for their allo-
cation decisions. Further, for titles in the Time Inc.
portfolio, we reviewed inventory and sales data from
wholesalers as well as stores. There we found tangi-
ble evidence of biased allocations, encountering stores
that either sold out almost every issue of a magazine
and stores that consistently sold only a small fraction
of their allocations.
An organization that wants to draw on research in
inventory management, thus beneting from formal
allocation methods, must through periodic reviews
exercise constant vigilance and commit to such
methods at all levels of the organization. After the
initial review, which was performed with the assis-
tance of an outside consultant, Time Inc., under the
guidance of the chief operating ofcer of its maga-
zine retail division, assembled a group of experienced
retail managers and dedicated research analysts who
were charged with developing distribution guidelines
and monitoring the implementation of these guide-
lines for Time Inc. magazines.
d1 1  d1 2      d2 1  d2 2      dN  1  dN  2     
The Problem
The allocation problem has a managerial side and an
analytical side. The managerial concerns stem from
Interfaces
Vol. 33, No. 3, MayJune 2003
the business realities in the channel and the associ-
ated limitations to optimally allocate product in a for-
mal manner. To consider such limitations in a formal
analysis of distribution, one needs to account for the
managerial concerns and constraints by looking for
optimal or near-optimal solutions within the set of
feasible allocation alternatives.
For each issue of a magazine, the allocation deci-
sion breaks down into three components that together
result in an allocation for each store that sells maga-
zines. The rst is determining the national print order
D, the total number of copies printed and shipped.
Because the cost and revenue structure of each mem-
ber in the channel is quite complicated, this deci-
sion does not lend itself easily to formal optimization,
and it is based on managerial judgment as much as
on formal economic reasoning. This decision is crit-
ically dependent on ongoing and successful negoti-
ations among all channel members to determine a
print order they all accept and that each member actu-
ally handles and processes. Such negotiations typi-
cally take place between publishers and wholesalers
on one side and between wholesalers and retailers on
the other side.
Once all agree on D, the publisher decides on the
allocations D1      DN for the N wholesalers who
must agree to distribute their allotments. The pub-
lishers allocation task is complicated by timing and
information constraints. Publishers, in general, lack
timely access to store-level data, but they have to
make wholesale allocation decisions three to four
weeks before a magazines issue goes on sale.
Each wholesaler needs to distribute its allotment Dj
to the nj stores it services; that is, it needs to deter-
mine the store allocations di j , i = 1     nj to retailers
who must consent to accept and display those alloca-
tions. Making these decisions is sometimes challeng-
ing because the decision window is narrow, only two
to three days before an issue goes on sale.
The outcome of this three-stage process is an alloca-


tion for each of the j nj stores that sell the magazine:
AD =
With an agreed-on national print order D, the over-
all objective is to nd the allocation that maximizes
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 KOSCHAT, BERK, BLATT, KUNZ, LEPORE, AND BLYAKHER
Newsvendors

expected overall sales and hence prots. The pub- The second task is to nd a process that gener-
lisher clearly identies with this objective, and its ates the best possible AD that can actually be imple-
channel partners objectives are easily aligned with mented. In inventory management, this problem is
it. The leading groups of wholesalers share the pub- called a constrained multiechelon problem (Silver
lishers interest in spreading a given print order opti- et al. 1998) for which optimal solutions under ideal-
mally across different wholesalers. Also, the typical ized conditions are readily available. Idealized con-
retailer operates several hundred stores, sharing the ditions do not prevail in magazine distribution. For
wholesalers and publishers interests in spreading example, the principal decision makers for the rst
print orders optimally across different stores. allocation decision, the publishers, have incomplete
Determining an optimal allocation is difcult information. Further, the principal decision makers
because demand at the store level is uncertain. This for the second allocation decision, the wholesalers,
demand uncertainty is captured by probability dis- generally have IT systems that do not permit a direct
tributions of demand that gure prominently in the implementation of formal optimal solutions.
development and analysis of optimal-allocation algo- The third task is to choose among competing fea-
rithms. Denote by fi j
k the probability that demand sible allocation procedures, essentially by estimat-
for an issue for Store i serviced by Wholesaler j equals ing and evaluating expected sales under different
k copies, and denote the corresponding cumulative procedures.
probability distribution function by Fi j
k. With a
product allocation of di j copies, expected sales in this
store equal Allocation Procedure
dij 1
The top-down sequence of allocation decisions deter-
 mining a national print order and allocating it to
E
sij  dij  = kfij
k+dij
1Fij
dij 1 (1a)
k=0 wholesalers and then to retailers is dictated by tim-
ing constraints and channel arrangements. The anal-
and, correspondingly, for an allocation AD , expected
ysis, on the other hand, is easily described from the
sales for the issue in question and all the stores dis-
bottom up.
tributing it are

ES
AD  = E
si j  di j  (1b)
i j
Store-Level Allocation
The algorithm for allocating product across stores
The process of nding the allocation AD that maxi-
served that maximizes unit sales has a well-known
mizes ES
AD  has three parts.
form. Assume that a particular wholesalers allotment
The rst task is to estimate store-level probability
for a given issue of a magazine has been determined
distributions of demand, fi j , for all the stores sell-
to be Dj . If the wholesaler serves nj stores, we will
ing the magazine. We performed a detailed analy-
denote the draw allocation that maximizes expected
sis of historical sales data made available by a major
sales by d1 j , d2 j      dnj j . Assume that the cumula-
wholesaler group for the Time Inc. title portfolio, and
tive distribution of demand Fi j can be modeled in a
we identied a exible class of parametric probability
parametric family; that is, Fi j
k = F
k 
i j , where
distributions that provide a parsimonious summary

i j is a vector of store specic parameters. Then, the
of store-level demand variation. We also found a sim-
optimal allocation for Store i is
ple way of coping with the problem of estimating
demand. The problem stems from the fact that, in gen- di j = F 1
 
i j  (2)
eral, we observe sales as the lesser of demand and the


amount of product distributed; in instances of sellout, where  has to be chosen such that i di j = Dj . The
the unobserved demand may be larger than observed sellout probability for each of the stores served is
sales (Appendix). 1 .

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Newsvendors
The practical application of this formula depends
on two critical steps. The rst is analytical and
requires store-level data on sales or, preferably,
on demand. With such data and careful statistical
analysis, an analyst can determine a class of suit-
able probability distributions and estimate the vector
of parameters
i j for each store. The second step is
to implement the allocation formula in wholesalers
product-allocation systems. If a system does not per-
mit an exact implementation of Formula (2), one must
determine the best possible approximation to (2) that
can be implemented.
For magazines, sales data are readily available. The
practice of returning unsold product for refund has
over time resulted in extensive store-level databases
that wholesalers maintain to track the associated
nancial transactions. In particular, for each of
the stores that they supply, wholesalers record the
amount of product shipped (in industry parlance:
draw), the amount returned (returns) and, by cal-
culating the difference between draw and returns,
the amount sold (net sales). By collecting these data,
wholesalers establish at the store level a sales history
for each magazine that they can use to make future
product allocations.
Using statistical analysis (Appendix) we found
the following: At the store level, the distribution of
(a)
30
20
Draw
10
0
0 5 10
Median of Demand
Figure 1: The left graph (Figure 1a) shows the optimal draw allocation based on Formula (2) as a function of the
median of demand, which for most practical purposes is also the median of sales. The right graph (Figure 1b)
shows the best approximation using a formula le superposed.
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Vol. 33, No. 3, MayJune 2003
demand is near normal or Gaussian on a power-
transformed scale. It depends on only one param-
eter, the location parameter. Estimating the location
parameter of demand by the sample median of sale
resolves the problem that sale, in general, is less than
demand. For making future allocations, using sales
data from the most recent four months usually yields
the best results.
These empirical ndings, in conjunction with
Formula (2), have an immediate implication: the opti-
mal draw level is a function of the median of demand
(Figure 1a). An actual implementation of the result-
ing allocation algorithm would require a wholesalers
store-allocation system to capture the relation dened
by Formula (2). Wholesalers systems generally lack
this capability, and wholesalers are generally reluctant
to change their systems.
Most wholesalers systems determine store-level
allocations using formula les. A formula le is essen-
tially a small table of multiplication factors, consisting
typically of four to eight numbers. Depending on the
magnitude of a stores median sale, the system applies
one of these factors to the median to determine the
stores draw. In general, the larger a stores sales vol-
ume, the smaller the multiplication factor. The result-
(b)
30
20
Draw
10
0
15 0 5 10 15
Median of Demand
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 KOSCHAT, BERK, BLATT, KUNZ, LEPORE, AND BLYAKHER
Newsvendors
ing relation between a stores median sales level and
the draw allocation is then piecewise linear, although
in general this relation is nonmonotonic.
The optimal formula les are those in which the
implied piecewise linear relation between median
sales and draw closely matches the relation deter-
mined by Formula (2) (Appendix). The overall match
between the optimal allocation and the one based
on the formula le is quite good, although the lack
of monotonicity of the formula-le allocation as well
Dj  = m, for a
as the fairly pronounced discrepancy for stores with
very small sales volume is worth noting (Figure 1b).
At a wholesaler, the allocation based on formula
Dj  = Sj /Dj , where
les works as follows: There is usually one for-
mula le per magazine that is implemented across
all wholesalers and that stays unchanged for at least
a year, often longer. For each issue and each store
served by a wholesaler the formula le is applied
and generates the stores base draw. The difference
between the wholesalers base draw, the sum of
its stores base draw, and the wholesaler allotment,
called oat, is then allocated proportionately.
Wholesaler Allocation
The publisher or its designated agent typically allo-
cates a national print order to wholesalers prior to
the store-level allocation. Short-term adjustments to
this production and distribution schedule are costly,
and publishers are loath to make them. Publishers in
general also lack easy and timely access to all of the
store-level data required for a comprehensive whole-
saler allocation. Hence, they need a procedure that
preserves the essence of the newsvendor problem but
that uses available data.
The data readily available to publishers are each
wholesalers historical draw, sales volume for each
magazine issue, and the respective ratios of sale over
draw. This ratio is referred to as gross efciency, or ef-
ciency for short. Related to gross efciency, but not
readily available to publishers, is marginal efciency.
For a magazine and Wholesaler j, the marginal ef-
ciency at draw Dj , denoted by mj
Dj , is dened as ing. These considerations must be reconciled with the
the efciency at the margin, that is, as the proba-
bility of selling the last copy of a magazines issue
shipped to that wholesaler. A wholesalers marginal
76
efciency depends on the composition of the stores
that it services, the distributions of demand at the
stores serviced, and the rules it uses to allocate draw
across stores. In terms of the respective marginal
efciencies, the algorithm for optimally allocating a
national print order D across N wholesalers has a
form similar to the prescription for store-level alloca-
tion spelled out by Formula (2). Specically, the opti-
mal draw allocation across the wholesalers, denoted
by D1  D2      DN , has to satisfy mj


suitable m, and Dj = D.
For practical purposes, a wholesalers marginal ef-
ciency can be estimated as mj
Dj denotes the last of Dj units shipped to Whole-
saler j and Sj are the unit sales lost would these last
Dj units not have been shipped. One can estimate
wholesalers marginal efciencies in market experi-
ments by varying draw across wholesalers and over
time and recording changes in sales and relating them
to the changes in draw. If store-level data are available
for a wholesaler, one can perform a pseudo market
experiment at a fraction of the effort required for a
full-edged market experiment with similar results
(Appendix).
Determining marginal efciencies through exper-
imentation is not a trivial undertaking because it
requires either time or store-level data. Hence, it
is desirable to nd a more readily available proxy
for a wholesalers marginal efciency. The relation-
ship between the gross efciencies of wholesalers and
their corresponding marginal efciencies is usually
pronounced and monotonic (Figure 2). In view of
this relationship, wholesalers that are regulated to
the same gross efciency will also have very simi-
lar marginal efciencies. Therefore, regulating whole-
salers to the same gross efciency results in a near
optimal allocation.
The practical allocation for a particular wholesaler
is the outcome of a pragmatic decision process that
takes into account a magazines historical sales perfor-
mance, including seasonal sales patterns, the whole-
salers store composition, expected market conditions,
and factors related to a magazines editorial offer-
overall objective of regulating all wholesalers to the
same efciency. This process is not entirely formulaic
but informed by market intelligence.
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 KOSCHAT, BERK, BLATT, KUNZ, LEPORE, AND BLYAKHER
0.40
0.35
0.30
Marginal Efficiency
0.25
0.20
0.15
0.10
0.55 0.60 0.65 0.70
Gross Efficiency
Figure 2: This relationship between gross efciency and marginal ef-
ciency by wholesaler is very pronounced, and it is captured well by the
line resulting from an OLS t to the data.
National Print Order
The optimal national print order is determined by the
protability of selling at the margin. Extending the
concept of marginal efciency that we introduced ear-
lier, we denote the channels marginal efciency for
a national print order of D by M(D) and dene it as
the probability of selling the last copy printed and
distributed. Were the marginal cost of producing and
distributing one copy of the magazine, c, and the rev-
enue per copy sold, r, unambiguously known, then
the national print order Do that maximizes newsstand
prots has to satisfy M
Do  = c/r. Further, the chan- revenues generally increase with the number of copies
nel partners would have to share costs and revenues
to make their cost/revenue ratios equal (Pasternak
1985). Unfortunately, the concept of a known constant
marginal cost and a xed revenue gure per copy sold
for each member of the channel does not accurately
reect business reality.
The wholesaler and the retailer each keep a xed
percentage of the newsstand cover price for every
copy sold, and there is little ambiguity in the revenue
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Newsvendors
structure. The cost structure is a different matter. The
wholesaler returns unsold product for a full refund
but incurs the cost of handling sold as well as unsold
product. This cost increases as the product allotment
increases, although not necessarily at a constant rate.
Adding an extra 100 copies to the distribution may
for all practical purposes add no cost; adding an
extra 100,000 copies to the distribution, on the other
hand, may require a costly change to the wholesalers
delivery infrastructure. The retailers cost structure
has additional layers of complexity. The retailer, too,
incurs handling costs for both sold and unsold prod-
uct. In addition, the retailer has inventory holding
costs. Other and less tangible costs are related to loss
of consumers goodwill that may result from stock-
outs (Fitzsimmons 2001). Retailers recognize such
0.75 0.80 costs even though they may be very hard to quantify.
They are also concerned with opportunity costs; for
example, putting an extra 100 copies in a store may
take space they could use to sell another product more
protably. Hence, for both wholesalers and retailers,
the assumed known and constant marginal unit costs
are rough approximations at best.
The publishers problem is reversed. The marginal
cost per copy printed and shipped is indeed known
and may be assumed to be constant; the revenue
structure is complicated. Publishers receive a certain
percentage of the cover price of each copy of their
magazines sold. Newsstand prots, however, are not
the only prot contribution; publishers also derive
revenues from advertising and subscriptions. Both of
these other revenue streams affect their newsstand
allocation decisions.
Determining the contribution to prots of incre-
mental advertising revenues is not easy. Advertising
sold, albeit at a decreasing rate (Koschat and Putsis
2000, 2002). The complication arises from the manner
in which advertising space in magazines is sold. Pub-
lishers guarantee advertisers that a minimum number
of copies of each issue will be sold; this is called a
magazines rate base. As long as a magazines sales
are below the rate base, an incremental sale of one
copy is highly valued. Once the sales volume exceeds
the rate base, the incremental value of an additional
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 KOSCHAT, BERK, BLATT, KUNZ, LEPORE, AND BLYAKHER
Newsvendors
copy sold is small in terms of its impact on advertis-
ing revenues.
Apart from the tangible contribution of advertis-
ing revenues, less tangible benets come with print-
ing and distributing one copy of a magazine even
though this copy might never be sold. In general, con-
sumer magazines do very little advertising. Instead,
each displayed copy of the magazine serves as its
own advertisement, informing its customersreaders
and advertisersof its presence and communicating
its major attributes through its cover page. Hence, a
particular copy of a magazine may not be bought but
may increase the probability of future purchases of
the magazine. Similarly, the value of a copy sold may
exceed the marginal newsstand revenue if that copy
motivates its buyer to subscribe to the magazine. Such
considerations make determining a revenue number
difcult.
Publishers often take newsstand economics as a
starting point for determining their national print
order targets for retail. Again, denote by M(D) the
channels marginal efciency, which can be estimated
in a manner similar to the estimation of wholesalers
marginal efciencies. Denote by Do the solution to the
equation M
D = c/r, where c is the marginal cost of
production and distribution, and r is the publishers
newsstand net revenue per copy sold. Do would be
the optimal print order level if newsstand revenues
were the only concern.
In view of its other revenue sources and as the
result of intense internal negotiations where news-
stand, subscription, and advertising concerns are
taken into account, however, the publisher aims for
a national print order larger than Do . In this decision
process, the retail marketing managers nd the rela-
tion M(D) to be an extremely valuable tool because it
provides a top-level view of sales at the margin. M(D)
depends on the probability distributions of demand
at the stores, the procedure wholesalers use to allo-
cate product across stores, and the procedure pub-
lishers use to allocate product across wholesalers. The
retail marketing manager can use M(D) to evaluate
the impact of different national-print-order levels on
her bottom line easily, thus determining acceptable
draw levels.
78
This use of business research results is a valuable
example of how business research and managerial
practice interact. Business research does not provide
foregone conclusions, in this case optimal product
levels; instead, it provides tools for managers with
scal responsibility that help them nd acceptable
solutions, even optimal solutions, within the con-
straints of their business realities. Brody (2001) made
a similar point on fruitful exchanges between business
researchers and managers.
The other channel members, wholesalers and retail-
ers, have their own reasons for establishing inven-
tory targets. Wholesalers make inventory decisions
for a multitude of titles, and retailers make stocking
decisions for numerous product categories. Therefore,
they undergo possibly elaborate internal negotiations
also. In determining the actual national print-order,
the publisher must reconcile its print-order targets
with those of wholesalers and retailers. This reconcil-
iation is part of an ongoing dialog among these three
channel partners.
Implementation
The success of our initiative ultimately depends
on how effectively we implement the formal solu-
tions developed by our researchers. Even though we
devised solutions for each link of the distribution
channel, we depend on the cooperation of the other
channel partners in the implementation. We call the
implementation of these solutions in the channel the
Draw Management Program. For each magazine, its
retail manager is the gatekeeper of this program.
Store Allocation
The retail marketing managers task consists of ensur-
ing that the formula les our research group devel-
oped are implemented in wholesalers systems and
allowed to work as intended. Wholesalers tradition-
ally used a small handful of ad hoc formula les that
often differed signicantly from the optimal formula
les. Further, distribution managers at wholesalers
often preferred to allocate magazines to stores based
on their market knowledge and felt uncomfortable
letting a computer algorithm perform this function.
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 KOSCHAT, BERK, BLATT, KUNZ, LEPORE, AND BLYAKHER
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As consolidation in the distribution channel forced Magazine Before After Reduction

wholesalers to improve their economic performance,
the major wholesalers have become familiar with the People 33% 23% 30%
theoretical underpinnings of optimal allocation and Sports Illustrated 42 24 43
Entertainment Weekly 40 31 23
are, in principle, open to implementing store-level
Time 41 31 24
allocations based on the concepts we outline. Time Money 25 20 20
Inc. wholesale representatives negotiate with whole- Fortune 41 30 28
saler personnel to get them to implement the formula Parenting 32 26 19
les that we propose. In the past, most of our formula InStyle 30 22 26
Life 22 17 23
les have been implemented.
Sunset 26 22 15
Time Inc.s retail marketing managers guide and Teen People 25 22 12
monitor the implementation through written commu-
nications called eld assignments. These eld assign- Table 1: We compared frozen and make-ordered draw prior to executing
ments are initiated by the marketing manager and are the make-order-and-freeze protocol and after its execution. This execution
completed and returned to the retail marketing man- resulted in a signicant reduction of frozen draw.
agers by the Time Inc. wholesale representatives. With
regard to the Draw Management Program, these eld many stores can now benet from optimal store-level
assignments concern (1) the wholesalers implemen- draw allocation based on formula les. The frozen
tation of the formula les, and (2) the amount of draw draw as a fraction of total draw, after this assignment
they allocate using the formula les. was completed, ranged from about 20 to 30 percent,
In completing the eld assignments, the wholesale a level Time Inc. currently considers acceptable.
representatives conrm that the wholesalers have put
the formula in place exactly as written. When whole-
Wholesaler Allocation
saler systems have limitations, Time Inc. researchers
create appropriately modied formula les. In the Time Inc.s retail marketing managers also determine
process, we have compiled a history of system idio- the allocations to wholesalers. Once the publisher
syncrasies to facilitate future implementations. decides the national print order, the retail market-
ing managers review historical draw and sales alloca-
The retail marketing managers also regularly orig-
tions, consider the local market knowledge provided
inate the make-order-and-freeze assignment to mon-
by Time Inc. eld personnel, and allocate magazines
itor and remove unwarranted make-orders and
to wholesalers (Figure 3).
freezes. Make-orders and freezes are draw allocations
Because publishers must make draw decisions to
made by a person, usually a wholesale employee,
meet future demand, they must anticipate market
rather than the system. A freeze keeps the draw at
changes. Time Inc. relies on its eld personnel to
a constant level that can only be altered manually.
spot changes that could affect a wholesalers optimal
Make-orders are short-term freezes, normally lasting
draw allocation. For example, frequent changes that
for four to eight issues, after which the formula le
can be known in advance occur in the number of
again regulates draw. Make-orders and freezes are
stores served by a wholesaler. Editorial decisions may
acceptable in some instances. For example, stores that
also affect demand for a wholesaler. For example, the
receive a magazine for the rst time have no sales
cover subject of an upcoming issue may be of special
history and therefore require a manual initial draw
interest in the wholesalers market. In such cases, the
allocation. publisher must modify the wholesalers allocation.
The rst make-order-and-freeze assignment dis-
tributed as part of the Draw Management Program
resulted in a reduction in frozen draw of 12 to 43 per- National Print Order
cent (Table 1). This is important: A store that is frozen The number of copies of a magazine that a publisher
cannot benet from optimal draw allocation. Overall, prints for the retail market is the subject of great inter-

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Draw and sales Efficiency comparisons

2.0
25000
Draw
Wholesaler A
Number of Copies

Gross Efficiency
0.0 0.5 1.0 1.5
Ratio
10000

Sales

Eff
0

0 10 20 30 40 0 10 20 30 40
Issue Issue

2.0
Number of Copies
Wholesaler B

Gross Efficiency
0.0 0.5 1.0 1.5
600

Draw Ratio

Sales
200

Eff
0

0 10 20 30 40 0 10 20 30 40
Issue Issue

Figure 3: These graphs illustrate how historical sales performance enters into consideration by comparing draw
and sales for People across two different wholesalers. The graphs on the right plot the wholesalers efciency
as well as a smoothed plot of the ratio of the wholesalers efciency to national efciency (estimated using
LOWESS, Cleveland 1979). In the middle of this 43-issue time period, we reviewed wholesaler allocations. Prior
to the review, Wholesaler A consistently had a gross efciency above the national average while Wholesaler B
consistently fell below the national average. While Wholesaler A received too much product, Wholesaler B
received too little. We corrected both wholesalers allocations. The extent to which the smoothed lines move
toward 1.0 indicates the success of this reallocation.

nal debate. Editors often seek to maximize this num-
ber, because their compensation is usually based on
absolute not marginal newsstand sales. Publishers are
judged on nancial results, and thus the protability
of a marginal sale is important to them, but not at the
expense of ruining their working relationships with
them.
After the publisher resolves its internal debates,
it must obtain wholesalers and retailers consent to
the proposed print-order levels. The retail marketing
manager must mediate among all partiesthe editor,
the publisher, the wholesaler, and the retailerand
this role in a system of such diverse interests is far
from easy.
Impact
The Draw Management Program has given our orga-
nization a clear understanding and acceptance of the
role of formal reasoning and managerial judgment.
The formal reasoning is largely driven by careful anal-
ysis of demand patterns at the various levels of the
distribution channel. The objective of this analysis is
to capture the uncertainty in future demand by esti-
mating marginal efciencies at the national level and

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80 Vol. 33, No. 3, MayJune 2003
 KOSCHAT, BERK, BLATT, KUNZ, LEPORE, AND BLYAKHER
Newsvendors

at the wholesaler level and by estimating probabil- to a common efciency in addition to using formula
ity distributions of demand at the store level. These les to optimize store-level allocation.
estimates can guide all channel members in making The second and third procedures yielded greater
proper allocations and help them to determine the expected sales than the ad hoc procedure (Table 2).
economic impact of specic allocations. Our evaluation of the second procedure captured the
The availability of store-level demand distribu- effect of using optimal formula les and removing
tions lets us calculate expected sales for different freezes. In practice, not all freezes can be removed,
allocations. We evaluated a particular allocation by and the numbers reported may overstate the sales lift
applying Formula (1) to the estimated demand distri- by up to 30 percent. We can infer the effect of optimiz-
butions from a statistical sample of stores and a set ing wholesaler allocations alone by taking the differ-
of consecutive issues of a given magazine. Once we ence in the sales stimulated by the second procedure
had chosen the stores and issues, we determined each and the third procedure.
stores and each issues draw as prescribed by the The median sales lift is 1.05 percent. This number
procedure we describe, estimated the parameter that is somewhat misleading because the titles that show
governs a stores probability distribution of demand, the greatest increase in sales are also those with the
and calculated expected sales for each store and issue. greatest circulation. Hence, the overall sales stimula-
We evaluated the allocation procedure by considering tion effect is solidly above one percent; about half of
the sum of expected sales across all stores and issues. the increase comes from improved wholesaler alloca-
There are three store-level draw-allocation proce- tion and the remaining half is from improved store
dures that we have evaluated. The rst procedure, allocation. While the improvement seems small, it
referred to as the ad hoc procedure, is the process comes simply from improving allocation and with-
that was in place prior to the implementation of out any additional production or distribution costs.
the Draw Management Program. It is a loose amal- Hence, the incremental revenue from the added sales
gam of heuristics and opinions that varied from goes straight to the bottom line, resulting in a hand-
case to case. There is no need to describe these in some prot to Time Inc.
any detail because what matters for our purpose is The increased prots are the result of careful sta-
the actual allocation resulting from this process. We tistical analysis, judicious optimization that can be
acquired historical examples of such allocations when implemented, and, most important, the institutions
we acquired the store-level sales data used in our
demand analysis.
Percent Due to Due to Improved
The second procedure is the formula le procedure. Sales Improved Wholesaler
We assumed that the national print order and each Magazine Lift Formula File Allocation
wholesalers allocation (and their equivalents in our
analytical universe) were the same as in the ad hoc People 1.38% 0.58% 0.80%
procedure. For each magazine, we used the best for- Sports Illustrated 1.26 0.56 0.70
Entertainment Weekly 1.22 0.62 0.60
mula le to determine the allocation. Specically, for
Time 1.10 0.41 0.40
each issue, we calculated a historical sales average, Money 1.05 0.79 0.26
applied the formula le, and allocated each whole- Fortune 0.94 0.30 0.64
salers oat. Parenting 0.82 0.26 0.56
In the third procedure, we combined the formula InStyle 0.73 0.44 0.29
Life 0.69 0.39 0.30
le and the wholesaler reallocation procedure. Again,
Sunset 0.49 0.26 0.23
we assumed that the national print order and its Teen People 0.47 0.30 0.17
equivalent in our analytical universe were the same
as in the ad hoc procedure. However, we also opti- Table 2: We estimated sales lift from using improved formula les and
mized wholesaler allocation by allocating wholesalers from improving wholesaler allocations.

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Vol. 33, No. 3, MayJune 2003 81
 KOSCHAT, BERK, BLATT, KUNZ, LEPORE, AND BLYAKHER
Newsvendors

commitment to improvement. The importance of this
commitment at all levels of Time Inc. cannot be
overemphasized. The commitment we needed was
not a commitment to save a dollar here or there.
It was a commitment to rational decision making,
to discussion, to debate, and to reason, and most
important, a commitment to staff with experts who
are respected by diverse constituencies, internal and
external. At Time Inc., our process has yielded more
than $3.5 million in incremental annual prots.
k = F
k  i  = 
third root transformation). (2) The demand distribu-
tion, on the transformed scale, is characterized by a
location and a scale parameter. The location param-
eter changes with a stores volume of demand. With
regard to the scale parameter, we found that the varia-
tion in demand is a function of expected demand; that
is, two stores that have the same expected demand
also have, for all practical purposes, the same level of
variation.
The distribution of demand can therefore be mod-
eled as
Fi

k i /s
i  (A1)
Appendix
Here,  is the cumulative distribution function of a
Estimating Demand Distribution standard normal distribution;  and the function s()
Denote the cumulative probability distribution of are magazine specic and must be estimated for each
sales for a particular magazine and for Store i by magazine. For a given store, this distribution then
Gi
k k = 0 1 2 3    , and denote the corresponding depends on a single parameter, namely i , which is
distribution of demand by Fi
k. If the draw for Store also the median of the demand distribution. Again,
i is di , the relation between Gi and Fi is as follows: if the sellout probability is small, the median of the
Gi
k = Fi
k for 0 k di ; also, Gi
k = 1 for k di . demand distribution equals that of the sales distribu-
Note that if the sellout probability, which is found as tion, and therefore, sales data can be used to estimate
1 Fi
di 1, is less than 0.5, then G1 1
i
05 = Fi
05;
the parameter of the demand distribution.
that is, the median of the demand distribution equals The practical problem is to allocate draw for a
the median of the sales distribution. Generally, the future issue, which requires predicting the median
larger di and hence the smaller the sellout probability, demand for that issue. If the distribution of demand
the closer the two distributions Gi and Fi are. For very for a particular magazine in a particular store is sta-
small sellout probabilities Fi Gi . tionary, then we should use all of the magazines sales
From an analytical point of view, inefcient distri- history in the store to estimate the demand distribu-
bution can have benets. In particular, if stores receive tion. If this distribution changes over time, we need
too much product and the sellout probability is small, to strike a trade-off between bias and variance by
then for all practical purposes, the probability dis- considering the mean-square error of the prediction.
The mean-square error is a function of the number
tribution of sales equals the distribution of demand.
of consecutive issues we use in making the predic-
This was the case for several thousand of the stores in
tion (Figure 4). The mean-square error is highest when
our analytical database, which allowed us to perform
we use only one issue, and it drops sharply as the
a comprehensive analysis of the shape of the demand
number of issues we use increases. It reaches its mini-
distribution. The two major insights are the following:
mum for four issues before slightly increasing. Across
(1) For the demand distribution, a simple parametric
numerous magazines we found the optimal number
model generally provides an excellent t. A power
of issues to span a time period of about four months,
transformation (also known as a Box-Cox transforma-
which for weekly titles corresponds to 17 issues and
tion (Hinkley and Runger 1984)) transforms the dis-
for monthly titles corresponds to four issues.
tribution of demand from a skewed distribution to a
distribution that is well approximated by a normal
or Gaussian distribution. The exponent in this trans- Developing Formula Files
formation typically varies from 0.25 (equivalent to a The optimal draw allocation for Store i is given by
fourth root transformation) to 0.33 (equivalent to a d
i  = F 1
  i , where 1  equals each stores

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82 Vol. 33, No. 3, MayJune 2003
 KOSCHAT, BERK, BLATT, KUNZ, LEPORE, AND BLYAKHER
Newsvendors

the optimal draw allocation and the allocation dened

54

by l
 b r, that is,
52

 
T
b r = l
mi  b r d
mi /mi 
44 46 48 50

mi
Mean Square Error

We want to determine the formula le, b and r, that

minimizes the objector function. Note that
 
T
b r =  l
mi  b r d
mi  /mi
j bj1 mi <bj
 
Median =  rj d
mi /mi  
42

j bj1 mi <bj

It is well known that, for a given b, each minimiz-

40

Mean
ing rj is the median of the d
mi /mi corresponding
2 4 6 8 10 to the stores that fall into the jth bucket. Hence, it
Consecutive Issues remains to determine the bucket boundaries that min-
imize T
b r. Because the bucket boundaries have
Figure 4: This graph is based on two years worth of data from 1,200 stores to be integer valued, this is a fairly straightforward
for InStyle magazine (23 issues). We calculated the mean square error as
numerical exercise. We omit the details.
the sum of squares of the difference between the historical mean (median)
and sales across the 1,200 stores and the 14 nal issues for consecutive
issues ranging from one issue to 11. The sample mean is a slightly better
predictor than the sample median. Sample means and sample medians
Estimating Marginal Efciencies
calculated from four consecutive issues produce the best prediction. For Wholesaler j, marginal efciency is dened as the
probability of selling the last copy shipped. This prob-
ability can be estimated as mj = Sj /Dj , where Dj
probability of selling out. Under optimal alloca- denotes the last of Dj units shipped to Wholesaler j
tion, 1  also equals each wholesalers marginal and Sj are the unit sales that would not have been
efciency. Gross efciency, marginal efciency, and made had these last Dj units not been shipped. We
sellout probability are closely related. Hence, if the can easily estimate the marginal efciency for whole-
channel partners agree to aim for a particular gross salers for whom we know store-level draw and sales
efciency, this target can easily be translated into tar- data for enough issues by taking the following steps:
gets for marginal efciency and sellout probability (1) Denote the total draw across the set of issues con-
targets. sidered for Wholesaler j by Dj and consider a small
Denote a stores historical sales median by m and draw reduction of Dj that may amount to ve to
the optimal allocation by d
m = F 1
  m. Denote 10 percent of Dj . (2) Allocate the draw reduction Dj
the allocation dened by a formula le by l
m  b r; across the stores served by the wholesaler in a man-
here b =
b0  b1      b8  is the vector of integer valued ner consistent with that wholesalers practice, that is,
bucket boundaries such that 0 = b0 b1 b8 = allocate a negative oat of Dj . (3) For each store
, and r =
r1      r8  is the vector of multiplication and each issue, compare the (hypothetically) reduced
factors corresponding to the eight buckets. For bi1 draw with actual sales. If actual sales were below the
m < bi  l
m  b r = ri m. reduced draw, the store would have lost no sales. If
To determine the optimal formula les, we con- actual sales were above the reduced draw, the dif-
sider a sample of storeswith historical sales medi- ference between the two are sales the store would
ans mi that reect the retail environment we operate have lost. (4) Add the sales losses across stores and
in, and we dene the objector function T
b r as the across issues and denote this sum by Sj . Sj is the
weighted average of the absolute differences between sales the wholesaler would have lost had its draw

Interfaces
Vol. 33, No. 3, MayJune 2003 83
 KOSCHAT, BERK, BLATT, KUNZ, LEPORE, AND BLYAKHER
Newsvendors
been reduced by Dj . (5) Estimate the wholesalers
marginal efciency as mj = Sj /Dj .
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Diana DeFrate, Vice President of Finance and
Strategic Planning, Time Distribution Services Inc.,
Time & Life Building, Rockefeller Center, New York,
New York 10020-1393, writes: This letter is to con-
rm that the Time Inc. Draw Management Program
described in Newsvendors Tackle the Newsvendor
Problem has resulted in budgeted annual savings in
excess of $3.5 million to Time Inc.
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Vol. 33, No. 3, MayJune 2003